The word “bankruptcy” can bring a shudder to nearly anyone. The idea of going through the embarrassing and heartbreaking process is very difficult to ponder. But many people find themselves in that situation. And many more likely will file for bankruptcy as we emerge from the social upheaval of the COVID-19 outbreak and economic fallout from the government’s lockdowns.

If you find yourself in this situation, it’s important to ask yourself some questions before you consult with a bankruptcy attorney. Remember, the attorney will have a vested interest in advising that you file, so it’s important that you know first that this is your last resort to fixing a difficult financial situation.

Keep in mind, I am not an attorney, and this is not legal advice. But I offer practical suggestions surrounding the subject of bankruptcy before you ask someone who has an interest in your filing. If you believe that you absolutely need to file for bankruptcy to avoid an imminent financial threat, consult with an attorney in your area.

Questions to Ask Yourself First

Can I take care of my basic household expenses with all the bills I have to pay, starting with food, utilities, housing, and transportation?

How far behind am I on my debts and other bills?

Is this difficulty due to bad financial habits, or some unforeseeable event that blindsided me?

Can I try to negotiate settlements with debts that are far behind, or lower payment amounts for a season so I can gain traction again?

Is there any creditor currently suing me, or any creditor that has a judgment against me?

If I do file, what could I lose?

If I do file, what could I gain?

The Benefits of Bankruptcy

The entire purpose of the bankruptcy process is a fresh start. All of the convoluted sections in Title 11 of the United States Code are there to help insolvent debtors start anew without the crushing weight of their debts holding them back.

One of the immediate benefits of filing is the protection of the automatic stay. This acts as an injunction against all collection actions against you. The creditors must negotiate with the trustee based on what assets are available and the type of bankruptcy that is filed (more on that in a moment).

The benefit that everyone hopes to gain is the discharge. Debtors, after assets are administered or the payment plan is complete, can have many of their debts discharged by the bankruptcy court. They can then start with a clean slate.

The Risks of Bankruptcy

When filing a petition for bankruptcy, a significant portion of your life is handed over to someone else: the bankruptcy trustee. The trustee represents the bankruptcy estate (not you). He or she will take into account all available assets that are in your name at the time you file, and sometimes during the months before.

In a Chapter 7, your assets are put together into the bankruptcy estate. Some property is exempted and your attorney will help you decide what assets to take as exemptions. But other property will be taken by the trustee and sold, with the proceeds being used to pay the creditors. This means that some of your things will no longer be yours when it’s all said and done.

In a Chapter 13, you are set up on a payment plan over 3 to 5 years. The trustee still maintains significant control over your discretionary spending during this time. You will have little latitude to make your own financial decisions and this can be very disheartening.

A bankruptcy will severely impact your credit. Depending on what type of petition you file, it can stay on your credit report for seven to ten years. It can make getting an apartment more difficult, buying a house very difficult, and can even preclude you from certain types of employment (like the legal profession and jobs that require security clearances).

One thing that is absolutely critical in the bankruptcy process is telling the truth. The statutory scheme heavily penalizes debtors who file fraudulent petitions or who lie to the court about their assets.

In short, do NOT, under ANY circumstances, lie to the court. If you file, tell the truth from the start, and keep your integrity intact. If you don’t, you can lose the right to a discharge and could be subject to criminal penalties.

There is also the inevitable feeling of shame that frequently comes with filing for bankruptcy. The filer may feel incompetent and helpless. But occasionally, bankruptcy can be the only viable option that remains for a debtor who has run out of options.

The Alternatives

Before rushing to a bankruptcy attorney to ask about filing, consider what else you may be able to do first. Some of these things I am doing with my coaching clients right now, with the goal being that they stay out of bankruptcy court.

Cash out retirement investments

This is never an ideal option. An early withdrawal subjects you to heavy taxes and penalties under the Internal Revenue Code. It also takes away the potential gains you could have had in that account. You can always put money back into your retirement accounts. But you can’t get back the time that has passed.

But if you have a significant amount in your 401k/IRA, to avoid a bankruptcy (or a foreclosure), it may be worth the tradeoff.

Sell your house

If you are a homeowner, consider how much equity you have in your home. If you can gain a significant chunk of cash from selling your home, this can put you in a position to catch up or negotiate.

You’ll have to rent for a time. But if you stay out of bankruptcy court, you can repair your credit fairly quickly as you catch up and pay off your debts.

Negotiate with creditors

This may be the hardest suggestion of all. Confront the people who are coming after you and your family and say, “Can we make a deal?”

Explain some of the details of your current situation. There’s a lot of debt involved and you want to pay it back, but need some flexibility to make that happen.

If they don’t work with you, you may have to file for bankruptcy and they may get far less than they otherwise would. Ask for temporary payment arrangements so you can gain traction and either settle or pay it back in full.

Book Your Free Call Today

If you’re considering bankruptcy, odds are things feel very dark and hopeless. But I believe there is always hope. You have the ability to be an agent of change in your life and to take control of your financial destiny.

Filing for bankruptcy doesn’t have to set back your hopes and dreams for a decade. There are other ways to pay off your debts, build wealth, and find the freedom you’re looking for.

Schedule your free audit call with me today to see how you can avoid bankruptcy.

This article was originally published by Financial Coach Seth Connell in March 2021. It has been modified and republished with permission.